Archive for month: August, 2012

And Profit Can Kill Your Growth

Huh? Aren’t profit and growth both good? Only in the right sequence. Focus on the wrong one at the wrong time and either one of them can drive you out of business.

At Startup, It’s All About Profit
Startups make the mistake of thinking what they need right away is growth. We measure growth in a number of ways, and all of them are largely unhelpful to an early stage business:
1) Revenue (is not profit!)
2) Market Share (lots of new customers)
3) Operational scalability (lots of new people, machines or square footage).
4) More investors (lots of cash being invested early on)

Problem: The ONLY thing that matters in the very early stages is finding something that can and will make us profitable for the life of the company. Why? Amar Bhide says 93% of all businesses leave their prime objective to become profitable. I think it’s even higher. If you focus on growth first, you’re almost certain to grow something that won’t be your long-term profit center, and backing out of it could be disastrous.

In 2006 we started Crankset Group believing our main profit center was something we stopped doing two and a half years later, and will never do again. It took us longer than normal to find our profit center, and I’m very thankful we didn’t invest a lot in making it go. Committing a lot of resources to it early on might have us mucking along trying to keep it alive just because we were too vested to move on.

An emphasis on growth before you’re 100% convinced you’ve found your long-term profit center will drain your resources and drive you out of business, by chasing an idea or a product that hasn’t been tested by your customer’s checkbooks (the only true focus group). Find your REAL prime objective, the one that will create long-term profitability, first. It almost certainly isn’t what you planned.

Found Your Profit Center? Forget Profit!
The game shifts radically once you’ve found what will make you profitable in the long run. Most business owners miss this one. I worked for a company that became profitable, decided to stop investing, and three years later, profited and saved their way right into bankruptcy.

Most small business owners do the same thing. As soon as they become profitable, they have something to protect (profit), and they’ll protect and defend that profit so fiercely that they either never hire anyone else to build the chair (I can do it cheaper myself) and never get off the treadmill, or their business becomes obsolete and just fades away. This is where Ray Kroc’s (founder of McDonalds) terse warning applies, “If you don’t want to take a risk, get the hell out of business.”

After finding your profit center, if you are worried about profit, you will likely never grow.

Growth means one of two things – you grow enough to build a true business that can make money while you’re on vacation. Or if you want to be Giant Corporation, Inc., then growth means figuring out how to capture the most market share. Most business owners will never want to be Giant Corporation, Inc., but all of us should grow our businesses to the point where we are no longer hostages, but can very regularly get away and enjoy the fruit of our business. To do that, focus on profit first, than be willing to take the risk to focus on growth, even at the risk of short-term profit.

It’s Worth the Risk
If you take the risk to grow, you’ll make a lot more money in a lot less time, for a lot longer than if you focus solely on profit.

And why Smallnand Local Business Does.

We’re addicted to big, and part of that addiction is the assumption that big corporations are the answer to job creation. But if jobs are created, it’s going to be almost exclusively by small and local businesses. Here’s why.

“All net job growth in the United States comes from firms less than one year old, formally defined as startups.

All other ages of firms, including companies in their first full years of existence up to firms established two centuries ago, are net job destroyers, losing 1 million jobs net combined per year.

Startups (businesses under one year old) aren’t everything when it comes to job growth. They’re the only thing.”

Only Small and Local Business Creates Jobs
This proves what many have said for decades, that small and local business is the engine of job creation in America. 98% of all companies using an Employee Identification Number (EIN) have 19 or fewer employees. If you include companies using the owner’s Social Security Number instead of an EIN, it’s closer to 99.9%.

Approximately 600,000 new businesses are established each year with EIN numbers, and probably a million more with the owner using their Social Security number. 99.9% of EIN and SSN startups will always be small, and since all net new job creation is in the first year of business, we should be doing everything we can to promote the establishment of small and local businesses.

Local Government Should Court Small Businesses, Not Big
The Kauffman report goes on to say that local governments should never court giant corporations to their towns because they are net job destroyers and will do more damage than good over their life cycle. The emphasis should be on encouraging new startups.

If we want job growth in America, we need to focus on helping small and local business owners in their first year of business. But that’s not something the government or big business wants to do.

Startup America is not for Startups
Startup America is a White House initiative that includes a venture capitalist based corporate counterpart, Startup America Partnership. Although it uses the word “startup” in its title, it is not about startups at all. Their stated focus is existing 3-12 year old (not startup) businesses, what they call “speedups”, that want to become giant corporations.

Scott Case, the CEO of Startup America, the White House press releases, and the mission statement of Startup America all say repeatedly that Startup America is not focused on small business in any way. Scott Case says Startup America is focused solely on “giant businesses that just haven’t scaled yet.” And they go on to describe them as companies that are up to 12 years old that want to be giant corporations. These are not startups by any definition.

This contempt and disregard for small business owners isn’t new. Politicians on both the left and the right are largely addicted to big and have no regard for the small and local businesses that are the engine of job creation in America. No one in Washington on either side is a true advocate for the small and local business owner.

It is always “big” (big business and/or big government) that gets us into economic messes, and small and local businesses and local government who get us out of them. Kauffman has put the full weight of their research behind this fact.

Small is Bigger than Big
Small and local business is the engine of our economy and the source of 99% of job creation. It’s too bad that both sides in Washington are addicted to big, because the biggest thing we have in America to solve our problems is 28 million small businesses.

Your success depends on them.

Every one of us runs our business on our beliefs. The problem is most of us don’t write them down. We’re winging it, so that in the most critical decisions, we wander away from what we believe and decide based on the shiny object in front of us. Success requires that we stay true to what we believe – all the time. What do you believe? Write it down, and make every decision based on it. Here’s our beliefs:

Transformation
We believe in transformation, not education. We are not interested in anyone learning anything, we intend that business owners will change as a result of contact with us. As a result, we lead from our experience, not from our knowledge. Great Crankset Group Stakeholders will have lived what they are asking others to do.

Clarity
We believe in bringing Clarity, which brings Hope, which allows business owners to take measured Risks to grow. – Clarity, Hope and Risk.

Conation
We believe in Conation. Conation is the most important word we train people to use. Even though it is one of the 1,000 most obscure words in the English language, it is far and away the most important word in business. Conation – committed movement in a purposeful direction.

Prisoners
We believe in prisoners. Most business owners are hostages to their businesses for 30 years, then sell their job to someone else who will be a hostage. We intend for Business Owners to build a Mature Business in just 3to5 years, that they can enjoy for decades. They must move from hostage (no business rules) through prisoner (consistent business rules) to freedom.

No Rugged Individualists
We believe the Rugged Individualist is a bad idea. Business owners should live in Committed Community, and those that do make more money in less time and are more successful. We are recovering Rugged Individualists.

Time is the New Money
We believe Time is the New Money. Most business owners only ask their business for money, but our business should give us both Time and Money, which allows us to create Significance.

Speed of Execution
We believe in Speed of Execution. Implement now and perfect as you go. Waiting around for perfection is a bad idea.

Bad Plans
We believe in Bad Plans. “Bad Plans Carried Out Violently Many Times Yield Good Results. Do something.” It’s never how good your plan is that matters, but how committed you are to the Bad Plan you’ve got. Committed people make history. Thinkers write about them later. Stop thinking. Get moving.

Yield Per Hour
We believe in Yield Per Hour – YPH. We expect business owners to always ask two questions “How do I make MORE money in LESS time?”, and “What is the highest and best use of my time?” Make money while you’re on vacation, and do it in 3to5 years.

Trapeze Moments
We believe in Trapeze Moments. We encourage business owners to embrace trapeze moments and take the risk to grow personally and to build a business they can enjoy for decades.

Advisors
We believe in Advisors, not in experts or gurus. We don’t use the words “coach” or “consultant”. We combine them both to advise business owners, and give them the tools they need for success, so they can grow their businesses to Maturity and get to their Ideal Lifestyle.

Own Your Business, Don’t be Owned by it
We believe in Business Owners. Business owners take the risks that make them the best leaders and the best hope for a better world. Nobody pays attention to business owners with fewer than 10 employees. We do.

Employees are a Bad Idea
We don’t hire employees, which the Industrial Age turned into children. We hire Stakeholders who grow with the company, who make meaning, not just money, who share in the profits and take ownership, and who live and work like adults. We hire people who can’t wait for Monday because they are part of something that will make a difference.

Managers are a Bad Idea – Lead!
We don’t hire people to manage people. Adults manage themselves. We hire leaders who focus on being productive themselves, not on making other people productive.

Committed Community
We believe business owners are the most successful when they live in Committed Community with other business owners and have a safe place to say three magic words, “I don’t know.” Together we get there faster.

The Big Why – Doing What Matters
We believe that every decision we make should support our Big Why – we believe we will change the world, and that every business can play a part in doing so – why come to work if you can’t? Our driving force – “Why do what others can and will do, when there is so much to be done that others can’t or won’t do.”

Work and Play
We believe the Industrial Age artificially separated the two – we’re bringing them back together.

Make MeaningWe make decisions based on what we believe. What do you believe? Write it down and then use it to guide you through everything you do in business. Get a compass – a true north – and stick to it. You’ll be a lot more successful if you run your business on your beliefs, on making meaning, not just on making money.

How now, never later.

It’s a terrible long-range planning question, but we love to ask “HOW will we get from where we are to our three year objective?” Asking HOW ensures nothing remarkable will happen and is much more likely to lead you to disaster.

Business planning gurus and academics love to teach us to answer all the outstanding questions before we get moving. And “how” we get from where we are to where we want to be is stressed above all else.

Life Happens
The problem is life. It keeps getting in the way of our best plans, and no matter how well we plan how to get where we want to go, as soon as we start moving, the world and life starts messing with our plan. It simply never works out anything like we planned, and the farther out we are planning, the less likely it is to work out.

A Harvard researcher found that 97% of all businesses leave their prime objective in order to be objective. The world’s greatest past and present businesses (Apple, Google, Facebook, HP, 37signals, etc.) all started out to do something other than what they ended up doing. And none of them did much pre-planning, if any.

Even among those few that wasted time pre-planning, they all took a left turn fairly early on to make money. Ben and Jerry put together a nice plan to make bagels, then they went out to buy a bagel machine and found they were expensive. The bagel machine salesman told them ice cream machines were less expensive, so we have Ben & Jerry’s ice cream instead of bagels.

Strategic vs. Tactical
“How” is not a strategic question. It shouldn’t be asked in long ranging planning. That doesn’t make it irrelevant. It is a great short-term, tactical question. Once you figure out where you want to be three years from now, ask “How will I get from where I am to the next step?” Use “how” to answer one step at at time on the way to your long-range objective.

Use “how” only in the short term
Webvan.com pre-planned how to get all the way from non-existent to being a $2billion company, and never wavered from their great plan. They went bankrupt a few years later, taking all $2billion in investor’s money with them. Like Webvan, answering the long-range “how” is much more likely to make us think we’ve got it all figured out, and will keep us from responding to the cues from the real world that always lead us to success. Remarkable things come from answering short-term “how”. Disaster is more likely when answering long-term “how”.

Never use “how” for long-range planning. Use “why”, “where” and “when” for the long-range stuff. Once you know exactly where you want to end up and when, then ask “How do get from where I am to the next step?” Come up with a plan to get through the next few weeks, then ask short-term “how” again. And do it a thousand times on the way to your objective.

A Thousand Short-term “hows”
Life and business are to fluid to ask long-term “how”. Keep “how” for the short term. You’re much less likely to run into problems if you ask a thousand short-term “hows” than if you ask a thousand long-term “hows”.